A recent report from the Federal Reserve Bank of New York revealed the nation’s rapidly increasing student debt levels may be leading to decreased business for the automotive and housing industries and other markets. The total U.S. student loan debt was estimated to be $966 billion in 2012, which is more than what consumers have borrowed through auto loans, credit cards, and home equity loans combined. Only home mortgage debt exceeds that amount. The typical student loan borrower has $20,000 in student loan debt, which is nearly double the amount in 2003.
As student loan debts increased, these borrowers were less likely to take on other types of debt, indicating fewer purchases took place. The total debt of a typical former student actually declined from about $35,000 in 2008 to $30,000 in 2012. Homeownership rates among 30-year-old student loan borrowers dropped 10 percent since the beginning of the recession began. Unlike in previous years, the typical 30-year-old student loan borrower is now less likely to have a home mortgage than people their age who never borrowed money for school. Similarly, young student loan borrowers are less likely to have auto loans than they were at the start of the recession, and they are now less likely to hold auto loans than people having no history of student loans. Only about 30 percent of student loan borrowers have an auto loan, down from about 37 percent in the decade before.
The report attributed these declines in borrowing to a few key factors, including weakened job opportunities leading to decreased consumption, and stricter lending requirements making it less likely for them to be able to borrow money. Having a large student loan can prevent young borrowers from qualifying for other loans, particularly if they don’t have a perfect re-payment history. The report showed that since the recession began, student loan borrowers are more likely to have worse credit ratings than those who never borrowed for school.
While highly skilled young workers have traditionally been a source of consumer spending in years past, unprecedented levels of student loan debt are preventing them from borrowing and buying in today’s economy. This could become an even bigger issue in later years if future generations of new graduates are unable to find opportunities allowing them to repay their student loan debts and fully participate in the economy.